A business never truly knows when some type of an emergency may hit. Just as individuals and families are needing to have an emergency fund when something major happens, the same can honestly be said for businesses too.
If a business does not want to fall into debt and deal with the hassle of debt collectors, then getting this fund is going to be exactly what helps out the company.
So, if you’re not wanting to make any mistakes as a small business owner, then an emergency fund needs to be built. But what are the major reasons a business is going to even need to create an emergency fund? Well, here are the five most common reasons.
1) There may be the case of unexpected costs that need to be addressed ASAP
A business without a backup plan for unexpected costs can be very dangerous. This is because there are many situations in which the company will be set back if they don’t have the funds for it. For example, if the company needs to buy new equipment right before the holiday season, they may not have enough money in their account to cover it and still maintain their normal spending habits. This can certainly be an issue that many small businesses make the mistake of. So, if you’re wanting to know the do’s and don’ts of being a solid small business owner, then working on this should be one of the top priorities.
2) There is always the potential of an economic downturn
A crisis can happen at any time, and it is important for any business to have a fund that can cover operational costs. This emergency fund will ensure your company has funds on hand should the economy take a turn for the worse. The recent COVID-19 pandemic and even the current recession are both great examples of the economic downturn that businesses needed to face.
3) Natural disasters could always have the potential to happening
With the increasing frequency of natural disasters due to climate change, it is important that businesses have an emergency fund set aside to cover any unexpected expenses. With a cash reserve, business owners can keep their operations up and running even in a disaster’s aftermath. The cost of these events can be expensive and the funds can be used to cover the cost of lost wages, repairs, future income, or temporary employees.
4) There might be unforeseen expenses
Businesses need to have an emergency fund in place when they experience unforeseen expenses. This ensures the company can continue with its day-to-day operations and stay afloat. There are two ways to set up an emergency fund: When businesses experience emergency expenses, they may not have a buffer to cover the cost. A financial emergency fund can protect companies from the potential impacts of a disaster. To be prepared, businesses should aim to set aside 3-6 months of operating costs as an emergency fund.
5) Sometimes, expenses just come up unexpectedly
Many businesses do not run on a consistent, predictable cash flow. Sometimes, something may break, other times, some bills will be bigger than usual. Having an emergency fund will allow these costs to be covered with ease.
